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January 2012

Q: I am turning 60 next year. Should I apply for CPP now or wait until I am 65?

A: It sounds like you realize that electing to receive CPP prior to age 65 means that your monthly pension will be less than if you waited until age 65 to apply.

There is no simple answer to this question, which explains why you may have received conflicting advice.

Here is what you need to know to make a decision that is right for you.
The most recent changes to the CPP were designed so that if you live an average lifespan, there is no advantage or disadvantage to taking benefits early. There are some situations where taking CPP early or later make really good sense. Perhaps you fall into one of these categories:

Early CPP situation #1

You need the money – If have a cash flow deficit that early CPP benefits will cover, it makes sense to take it rather than build debt.

Early CPP situation #2

You are in poor health – If you expect a shortened life expectancy either because you have health issues or because your family history is one of shorter life spans, taking early CPP is a good bet.

Early CPP situation #3

You spent a number of years out of the workforce - Your pension amount depends on averaging your contributions and “pensionable earnings” from age 18 until you start taking CPP. You’re allowed to drop 15% of your lowest-earning years from the calculation, which amounts to seven years if you retire at 65. If you took time off work to raise kids or because you had a serious disability, you get to drop even more of your low-earning years. The thing is, it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down. Under these circumstances, you’re clearly better off starting CPP early.

Later CPP situation #1

You expect to live a very long time – If longevity is in your family history, delaying CPP until at least age 65 means that you will have a larger pension for a long period of time.

Later CPP situation #2

You are still working – You can now begin receiving CPP benefits, and grow the benefit through continued contributions while you are working. That being said, you will possibly pay a higher rate of tax on CPP income while you are working than if you delayed receiving benefits until you retire.

As you can see, there is no simple answer to this question. Hopefully this outline will help you determine which approach is right for you.

Interestingly, all the actuaries I have heard speaking all say to take CPP as early as you can - You never know when you are going to die and if all your estate gets is the $2,000 death benefit is more than covered for most in a few months of even reduced CPP. I am not entirely convinced but the actuaries I have talked to keep to that philosophy.

Interestingly, all the actuaries I have heard speaking all say to take CPP as early as you can - You never know when you are going to die and if all your estate gets is the $2,000 death benefit is more than covered for most in a few months of even reduced CPP. I am not entirely convinced but the actuaries I have talked to keep to that philosophy.

Generalizations are simple, and can cover many bases, but may or may not be suitable for every individual.

For example, a single person with limited retirement savings who plans to work to age 65 or longer would be advised to wait until retirement to begin CPP benefits. This person would have a higher pension benefit for as long as they are alive. If they live a very long time they will benefit from the higher i...

Generalizations are simple, and can cover many bases, but may or may not be suitable for every individual.

For example, a single person with limited retirement savings who plans to work to age 65 or longer would be advised to wait until retirement to begin CPP benefits. This person would have a higher pension benefit for as long as they are alive. If they live a very long time they will benefit from the higher income in the long term. They will have little, if any, tax to pay on the income, whereas they might lose 30% to taxes if they took early CPP while still working.

An individual without estate preservation desires and few other retirement income sources tends to make different decisions than those wanting to leave an estate.

If I have RRSP room but not the income (I am trying to get debts paid off before I retire) to contribute extra would it not make sense to take my CPP now (I am 61) and use it to top up my RRSP? I would then negate the tax on the CPP payment.

If I have RRSP room but not the income (I am trying to get debts paid off before I retire) to contribute extra would it not make sense to take my CPP now (I am 61) and use it to top up my RRSP? I would then negate the tax on the CPP payment.

If all you receive in taxable income is CPP, you pay very little tax and the RRSP contribution won't be that valuable to you. In fact, you could end up paying more tax when you withdraw from the RRSP than you saved by making the contribution.

So the answer depends on what other sources of income you will have over the next 25-30 and what your income needs will be over the same period.

Hello Vivien,

If all you receive in taxable income is CPP, you pay very little tax and the RRSP contribution won't be that valuable to you. In fact, you could end up paying more tax when you withdraw from the RRSP than you saved by making the contribution.

So the answer depends on what other sources of income you will have over the next 25-30 and what your income needs will be over the same period.

And at the other end of the spectrum, if you have a substantial rrsp, wouldn't it make sense to start drawing on it first, at a lower amount, prior to age 71 so that you can minimize clawback on cpp/oas (as well as tax)?

And at the other end of the spectrum, if you have a substantial rrsp, wouldn't it make sense to start drawing on it first, at a lower amount, prior to age 71 so that you can minimize clawback on cpp/oas (as well as tax)?

Yes, sometimes that is an appropriate strategy. It depends on so many factors that a proper calculation is often necessary to prove it out one way or another. The OAS clawback doesn't begin until taxable income exceeds $70,954 (in 2013), so many Canadians won't be subject to the clawback even if they have substantial RRSPs. Married couples can income split 50% of RRIF income, which further reduces the risk of clawback and high taxation.

Yes, sometimes that is an appropriate strategy. It depends on so many factors that a proper calculation is often necessary to prove it out one way or another. The OAS clawback doesn't begin until taxable income exceeds $70,954 (in 2013), so many Canadians won't be subject to the clawback even if they have substantial RRSPs. Married couples can income split 50% of RRIF income, which further reduces the risk of clawback and high taxation.

I did a calculation for a client recently who between her and her husband had $1.2 million in RRSP assets and $300,000 in non RRSP investments. They are age 65. By drawing on their RRSPs before age 71, over the next 25 years they would save approximately $16,000 in tax. They would not be subject to the OAS clawback. So, not as meaningful an advantage as you might think.